Why China is important to us

Address to the National Press Club

Speech, check against delivery

3 April 2012

Trade with China has boosted household incomes

That the Australia China Business Council felt it necessary to prepare a report titled How China trade benefits Australian households is testament to ongoing scepticism within some segments of the community and political circles about the wisdom of the Australia-China business relationship.

It is a scepticism not shared by the Gillard Government.

Indeed, the strength, the benefits and the potential of the economic partnership between Australia and China were a prime motivation behind the Prime Minister's decision to launch a White Paper project on Australia in the Asian Century.

Not that China is Asia, but it is a big part of the Asian success story and of Australia's own economic success during our last two decades of recession-free economic growth.

More importantly, China will be a big part of Australia's future success in creating more prosperity and more and better jobs.

This is not to say that anyone expressing concern about aspects of the rise of China is wrong or cannot legitimately do so.

Nor is it to suggest that Australia should be anything other than clear-minded about the costs imposed on parts of Australia by China's rise, such as the effects on exporting and import-competing industries of the high Australian dollar, or the effect on vulnerable workers of competition from Chinese imports.

Government has a role to play in assisting those who are adversely affected by structural change associated with Australia's economic transformation in the Asian Century.

This is not a new notion: it was the philosophy practised by the Hawke and Keating Governments in fashioning Australia's open, competitive economy.

But let's not pretend that the China boom is bad for Australia overall, that we should demand that the world be stopped to enable us to get off and return to some nostalgic pre-Asia era when we relied for export income on the markets of Europe and North America.

This era might have been more certain but it was certainly less prosperous.

Indeed, a 2009 report by the Centre for International Economics has estimated that Australia's market-opening policies and associated engagement with Asia have increased household incomes by up to $3,900 per annum.

Another measure of the benefits to Australia of its economic engagement with China is the boost to our national income from the increase in the prices of our exports relative to the reductions in the prices of our imports – otherwise known as the terms of trade.

Australia's terms of trade took a sharp turn for the better from 2004 and have reached their highest sustained levels in 140 years. The income gain has been $6,800 per person.

Though the terms of trade are projected to come down from their stellar peaks – and have already begun to do so – the extra quantities of Australian production, mainly of minerals and energy, are expected to sustain those income gains for some time to come.

Diversifying the Australia-China relationship

As Australia continues its economic engagement with China the relationship can be both deepened and broadened.

Minerals and energy exports account for around three-quarters of Australia's total exports to China. Agricultural goods comprise another 7 per cent.

And in 2010, China surpassed the United States as Australia's biggest export market for services, which earned $5.7 billion in 2011.

Conventional wisdom holds that Australia cannot compete with China in the production of manufactured goods.

Yet last year manufactures comprised 6 per cent of total Australian exports to China, with the majority, around $2 billion worth, being sophisticated manufactured exports.

On these goods we are not only competing with China, we are succeeding on its home market.

In fact, over the last decade, exports of sophisticated manufactured goods to China increased by 230 per cent while to the United States they declined by around 10 per cent.

The Asian Century White Paper exercise will identify opportunities for broadening Australia's economic relationship with China and other Asian countries as we seek to diversify further into exports of agricultural and manufactured goods and of services such as education, tourism, financial services, logistics, architecture and design and entertainment.

Despite the recent gains and the enormous future potential of Australia's economic engagement with China, scepticism is finding expression in a series of assertions such as the following:

"We are being flooded by cheap Chinese imports."

"The Chinese have cheap labour so it's not a level playing field."

"The Chinese are buying up Australia."

"We're too dependent on China."

Each deserves an answer – a calm, sensible, well-informed response. Today, in launching the ACBC's Special Report 2012 update, I will provide them.

In doing so, I will seek to reassure those who, for want of accurate information, are anxious about the rise of China, who see China as more of a threat than an opportunity for more jobs and better jobs for them and their children.

But I will not seek to play on their anxieties for political gain, to threaten the Australia-China relationship and the livelihoods of those they purport to represent, in exchange for a few votes and public notoriety in furtherance of their political ambitions.

I'll leave that to the aspiring Deputy Prime Minister of Australia, Barnaby Joyce, and a band of his National and Liberal colleagues, comforted in the knowledge that true Liberals are appalled by their opportunism and economic recklessness.

Claim: We are being flooded by cheap Chinese imports

This is true. In contention is whether it is a good or a bad thing.

For consumers it is unambiguously good.

Those consumers who don't want inexpensive goods are not obliged to buy them. Those who do – especially the poor – are better off for their availability.

As inexpensive as many Chinese imports are, they must comply with Australian food, consumer safety and quarantine standards.

And under Australian law and procedures – recently revised by the Government – neither China nor any other country can legally dump goods onto Australian markets.

Media outlets that complain about cheap imports are doing the bidding of producers not of consumers.

Why should governments step in, as some tabloid media outlets demand, and prevent consumers voting with their purses, wallets and online accounts in favour of cheap Chinese imports?

Ironically it's often the same media outlets that complain on behalf of their readers about the high cost of living, but as former Senator Reg Withers once said: consistency is the sign of a small mind.

The idea that cheap imports are bad stems from the mercantilist view that exports are good and imports are bad. In truth, the whole purpose of exporting is to earn the income to buy items that can't be produced as inexpensively at home.

As the ACBC points out, one of the biggest advantages of trade with China for Australian households is the beneficial impact of cheap Chinese imports on the cost of living.

In the last 20 years, real prices for imported furniture, handbags, clothes, shoes and medical products have roughly halved; and have fallen by about two-thirds for computers, telephones and other electrical goods.

Not only are these price reductions of benefit to consumers – especially those on low incomes, who spend all or most of their earnings – they help keep a lid on the general Consumer Price Index (CPI).

And since the independent Reserve Bank of Australia targets inflation in the setting of monetary policy, the availability of cheap Chinese imports helps keep downward pressure on interest rates.

It's not only mortgage holders and credit card holders who benefit from lower interest rates, so do small business borrowers and working people, whose jobs are more secure at lower interest rates and who may enjoy the prospect of better jobs and higher pay in an expanding economy made possible by lower interest rates.

Not all producers are against cheap Chinese imports. All those businesses whose costs and therefore prices and profits depend on cheap imported inputs such as personal computers, office equipment, furniture and fabricated steel, are advantaged by Australia's trade with China.

The availability of cheap Chinese imports also applies competitive pressure to Australian businesses, driving them to be efficient and obliging them to charge consumers the lowest possible prices.

Without this competitive pressure they would be able to be less efficient and charge higher prices.

This was the Australian experience between 1950 and 1985, when the CPI rose by an average of 6.7 per cent per annum. In the period of market opening, 1986-2011, the average annual CPI increase was 3.7 per cent.

China's cheap labour makes the playing field uneven

Some producers identify the low wage rates paid in China as proof that China does not compete on a level playing field and that this is bad for Australia.

It is true that at the lower-skill end Chinese workers are paid much less than their Australian counterparts. A low-skilled factory worker earns as little as 80 cents an hour whereas the minimum wage in Australia is $15.50 per hour.

But this does not make for an uneven playing field, any more than Australia's abundance of natural resources makes the playing field with resource-poor Japan or Singapore uneven.

The idea of a single international wage rate is more Marxian than capitalist. Australia should not be trying to compete against China on low-wage production. It would be a race to the bottom; a race that we should not want to win.

In any event, as China's labour productivity continues to rise at around 10 per cent per annum, wage rates are rising, especially on China's eastern seaboard.

Low-wage business activities are migrating westward and increasingly to offshore locations such as Bangladesh.

Rather than trying to compete on wage costs, Australia's competitive advantage will be our highly-skilled workforce, strong innovative capacity, sound financial system, stable political system and well-developed institutions.

Drawing on these advantages, Australia could build a world-class manufacturing sector around areas of natural expertise, such as in farming and mining.

In the last five years alone, Australia's processed food exports to China have more than doubled to around $1 billion.

And there is no reason why we can't also learn from other high-wage, high-skill nations.

In Germany over half of the value added in its manufacturing industries is in high- and medium-high technology industries. This compares to about a quarter in Australia.

Germany has succeeded in linking together services and manufacturing, and building niche production lines for sophisticated machinery.

Against the backdrop of increasingly sophisticated regional production networks across the Asian region, there is no better time to look into the future of Australian manufacturing.

The Prime Minister has set up a manufacturing taskforce to do exactly that. It will meet again next week.

Claim: The Chinese are buying up Australia

National Party identities claim that China is buying up Australia's prime agricultural land, Deputy Prime Ministerial aspirant Barnaby Joyce recently asserting that:

"We've had an exponential increase in foreign ownership, especially by state-owned enterprises" (2UE Breakfast 16 March 2012).

The truth, as confirmed by the Australian Bureau of Statistics, is that 99 per cent of Australia's farms are wholly Australian owned.

In 1984, 5.8 per cent of the area of farmland was foreign owned.

By 2010 this had risen to 6 per cent, an increase of 0.2 percentage points over 26 years – hardly an exponential increase.

Senator Joyce went on to argue against foreign investment in these terms:

"If you invite your neighbours in to renovate your house and build an extra room on it, don't be surprised when you find them living in the room," and

"Another nation's government is quite obviously following another nation's purpose and that is to set up capacity to feed their nation from your nation. Of course, if they're feeding their nation from your nation, you're not feeding your people."

He then claimed that the Foreign Investment Review Board's screening threshold for such investments is $244 million, knowing full well that this is false; that every dollar of investment by state-owned enterprises is subject to screening.

Opposition Leader Tony Abbott has joined in the misrepresentation, referring to:

"… new types of foreign investment by state-owned entities that seem to involve the produce of Australia going overseas without any great market involvement here in Australia"

and indicating that:

"I think we do need to look at the threshold for Foreign Investment Review Board consideration of this kind of investment…Effectively agricultural purchases are exempted, as things stand, from Foreign Investment Review Board scrutiny and I think we do need Foreign Investment Review Board scrutiny."

Like Senator Joyce, Mr Abbott knows that all foreign investment by state-owned enterprises is subject to Foreign Investment Review Board scrutiny, but it suits his political purposes to pretend otherwise.

Claim: We're too dependent on China

Australia is a great trading nation. Since 1985 Australia's trade intensity (exports plus imports divided by GDP) has increased from 34 per cent to 41 per cent.

This was the whole purpose of creating Australia's open, competitive economy: to gain from selling goods and services abroad and buying from overseas the goods and services that are more expensive to produce at home.

Yet there is an emerging sentiment in some quarters that engaging commercially with the outside world, especially with China, is hazardous. This sentiment found expression in Mr Abbott's Budget Reply last year, when he said:

"If it is achieved, it is a surplus made in China, not Australia."

I'm not sure where Mr Abbott believes the Howard Government's Budget surpluses from 2004 onwards were made, when company income tax and capital gains tax revenue was falling from the sky, but why belittle the benefits to Australia from its successful engagement with China?

Australia's economic integration with China and the rest of Asia isn't good luck, it's good management.

With the stage set by Gough Whitlam's early official recognition of the People's Republic of China, economic integration of our two economies began with Bob Hawke's diplomacy and the Hawke-Keating economic reform program.

During the decade of the 2000s China's economic growth averaged 10 per cent per annum. Last year it was 9.2 per cent.

The Chinese authorities have forecast growth in 2012 of 7.5 per cent. Often it comes in a little higher than forecast, so 8 per cent would not be a surprise.

Why would Australia not wish to integrate its economy with China's of 1.3 billion people that has been and will continue to grow strongly?

Why would we hitch our fortunes to Europe that is struggling to grow at all?

Why would we want to withdraw from the world to buy and sell to ourselves, a return failed Fortress Australia strategy of the early post-War decades?

The rise of China is not temporary

As an economic and trade adviser to Bob Hawke in the late 1980s, it was clear to me that the rise of China was no temporary phenomenon.

My predecessor in that role, Professor Ross Garnaut, who subsequently became Australia's Ambassador to China, contributed in these terms to a 2020 Vision forum series I co-convened in Brisbane in the early 1990s:

"Australians in the year 2020 will live in a world in which the centre of gravity of economic production and power has shifted decisively to East Asia."

For domestic political reasons China will strive to continue growing at or around recent historical growth rates, as the Government seeks to spread the benefits of growth to the less well off provinces and moves towards domestic consumption as a source of growth.

But the best of intentions can be thwarted if China were to lack the capacity to grow further. Fortunately this is not the case.

China's rise is more accurately viewed as its re-emergence. China had the largest economy on earth for the best part of two thousand years before the Industrial Revolution.

But from the period of The Enlightenment and the invention of productivity-boosting devices such as the steam engine, and new factories reaping the gains from Adam Smith's observed power of the division of labour, huge leaps in the productivity of workers were achieved.

Europe and North America began enjoying a vast superiority in productivity over Asia, Africa and Latin America.

Living standards in the West surpassed those of the East, the advantage being sustained through the colonial era.

But China's market-opening policies from the late 1970s have stimulated rapid productivity growth as China exploited the catch-up possibilities available to a developing country.

By the 2000s, China's productivity growth was increasing at 11 per cent per annum compared with America's of just 1.3 per cent per annum.

As the East outpaces the West in the productivity race, Europe and the United States are surrendering their economic dominance.

This transformational shift in the global centre of economic gravity to Asia will be the defining feature of at least the first half of the 21st Century.

It's why the 21st Century is called the Asian Century. We are now into the second decade of the Asian Century.

The Gillard Government will continue the process of integrating the Australian economy with that of the fastest growing region on earth.

Australia warmly welcomed China as a Member of the WTO a decade ago, and is keen to work with China to promote an open global trading regime.

The Australian Government continues to pursue a free trade agreement with China, which would allow us to strengthen our commercial relationship further.

It would mean taking the next step in removing barriers to trade.

The Government recognises that FTA negotiations are difficult.

But the challenge now is to accelerate negotiations in a way that will meet both our interests – something we discussed at the last round a couple of weeks ago, and I'll continue to pursue with my counterpart, Minister for Commerce, Chen Deming, when I host his visit to Australia next week.

Some see the Asian Century as a threat; we see it as an opportunity for more prosperity and more and better jobs for working Australians.

We see it as an opportunity for Australia's children to thrive in the splendid diversity of careers available from successfully competing in the Asian Century.

And we accept the obligation to chart a path forward for our country through the Asian Century by putting in place the right policies for our times.

That's why we have embarked on the Asian Century White Paper project – putting Australia in the right place at the right time, in the Asian region in the Asian Century.

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